Economic Value Added as a Management Tool - A Study on Selected Banking Companies in Bangladesh

Abstract

Economic Value Added (EVA) is now being considered as an important management tool across the corporate world for measuring and rewarding performance inside the companies. Most of the companies measure performance with accounting profits which are often seriously biased measure of profitability. EVA is an unbiased measure of profitability. Unlike accounting profits, EVA indicates the value to what extent created by management or agent for shareholders. In Bangladesh, neither corporate sector nor banking sector applies EVA for analysing their performance. Both the sectors use accounting profits for measuring and rewarding performance.

The paper aims at analysing banks' performance through EVA. For this purpose, EVA has been calculated taking certain assumptions as to the cost of equity and operational profit adjustments. A rank correlation coefficient between EVA and different criteria indicates that ranking under 'Return on Asset', 'Net Profit', 'Net Profit Per Employee' and 'Deposit Per Employee' have close resemblances to the ranking under 'Interest Income' and 'Spread' does not match with the raking under EVA.

Keywords: Bangladesh, Banking Companies, Economic Value Added (EVA), Rank Correlation

JEL Classification: Banking, Finance